06 June 2008

BoJ Suda – U.S. financial markets continue to be unstable

Disruptions in global financial markets might not come to an end until market participants are satisfied with the re-evaluated prices of risk assets and the correction in the U.S. housing market has started to show signs of bottoming out, Suda said. 

The disruptions in global financial markets might not come to an end until market participants are to some extent satisfied with the re-evaluated prices of risk assets and there is a deceleration in the pace of expansion in the amount of impaired assets, Miyako Suda, Member of the Policy Board of the Bank of Japan said in a speech held end March and published today. He expects that the situation does not ameliorate until the correction in the U.S. housing market has started to show signs of bottoming out. 

 

Reviewing past events he did not expect the sub-prime mortgage to aggravate causing the deterioration in financial institutions' balance sheets and shortages in their capital bases, Suda said. “Recently, financial institutions and hedge funds have been reducing their asset holdings extensively, and this has impaired the functioning of markets to a considerable extent”, he noted.

 

Despite a series of countermeasures undertaken by US authorities the situation in the U.S. credit markets has worsened further since late February 2008, he said. This includes:

- the failure of a major fund to meet margin calls;

- reports of losses at U.S. government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac;

- reports of further losses at major insurance companies;

- the downgrading of regional financial institutions; and

- the decline in prices of municipal bonds. 

 

“On top of these events and the ongoing process of deleveraging, encashment of investments by hedge funds occurred in preparation for withdrawals”, he explained. “These events not only impaired the functioning of U.S. and other countries' credit markets but also destabilized asset markets more generally, including stock, bond, foreign exchange, and commodity markets.”

 

Summary of speech

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